Wage growth will feel effects of Great Recession for years to come

Apr 26, 2012 - 01:22 PM

The Great Recession has confronted U.S. workers with an extended buyer’s market in jobs, according to a new Executive Action Report from The Conference Board, leading to overall wage growth between 2008 and 2010 that was the weakest since the 1960s.

"Feeling the Pain: Wage Growth in the United States" examines prevailing trends in recent U.S. Bureau of Labor Statistics data and finds workers and wages still reeling from the downtown, with significant disparities across states and demographic groups in how strongly wage pressures have been felt.

“While there were signs of modest overall wage improvements in 2011, the severe depression of wage growth during the Great Recession — turning negative in the hardest hit regions — is likely to impact consumer spending, inflation, corporate profits, income inequality and employee engagement for many years to come," said Gad Levanon, director of macroeconomic research at The Conference Board and a co-author of the report. "Moreover, the uneven distribution of this pain among different groups may carry deep social and political implications for the future development of the economy.”

Pain unevenly distributed

Women’s wages are still, on average, close to 20 percent lower than men’s, but male workers have been hit especially hard by stagnating wages in recent years. Even in 2011, men’s wage growth had only rebounded to half the average rate of the previous decade, while women’s wage growth was nearly fully recovered. In previous recessions, like that of the early 2000s, no significant such disparities were found.

The Great Recession, however, concentrated its direst effects on industries like housing and construction, leading to an unemployment rate that was nearly 2.7 points
higher for men than women by October 2009. With this wide a gender gap in unemployment, a corresponding gap in wage growth is expected, as employers in traditionally male industries face a large supply of excess workers.

Likewise, the report found that the wage-growth gap between less-educated workers and those with bachelor’s degrees or above ballooned from less than half a percentage point before the recession to about 1.5 percent in 2008-10. In 2011, it appeared this gap was once again closing.

Similarly, workers in hardest-hit states like Arizona, California, Florida, Michigan, and Nevada — which relied on industries like construction and manufacturing, and experienced the greatest output declines during the recession — also saw wage declines of about 0.1 percent in 2008-10, compared to very slow, but still positive, wage
growth of about 0.8 percent in the rest of the country. (Nationwide, annual wage growth was just under 3 percent in the decade 1998-2008.)

Slow recovery for young and underemployed

Serious disparities were also found within industries and companies between those who managed to hold on to their jobs through the recession and the more recently hired.

In general, the phenomenon of “downward wage rigidity” keeps employers from significantly cutting the wages of existing workers even in severe downturns. For this reason, wage pressure has disproportionately fallen on the previously unemployed or underemployed, who find returning to the work force means new jobs at lower pay.

This effect was found strongest among highly educated workers, where new hires can expect to earn about 30 percent less than existing employees — suggesting that low-skill labor is more easily transferable between positions and less prone to mismatch than roles filled by the more highly educated.

Along these lines, new college graduates have been among the very hardest hit, with a total wage decline of more than 5 percent in 2008-10, compared to those who graduated before 2008.

Young workers in general have faced difficult starts to their careers, with wages for those aged 15-20 declining 0.5 percent over 2008-10, and for those aged 21-23 declining over 1.5 percent.

New college graduates are particularly apt to settle for lower-paying jobs than they expected, often in areas outside their fields of study or expertise. But all workers, according to "Feeling the Pain," are adjusting their expectations as continued high unemployment has allowed employers to hire more educated and experienced employees at wages equal to or lower than they were paying before the recession.

Thus far in the recovery, stagnant wages alongside constant or growing revenue has meant a rapid rise in corporate profits, shifting income to the wealthier households
that tend to be top stockholders. This effect, combined with the higher wage-growth rates of skilled positions, is likely to extend recent increases in income inequality.

At the same time, continued slow wage growth will make hiring U.S. workers relatively less expensive than hiring workers abroad or investing in labor-saving machinery — which may ultimately increase overall employment.

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